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Dollar Heavy

The US dollar is heavy to start the week. Its gains are concentrated against the European currencies, whereas the yen weakness is a notable exception. Sterling has been lifted to new multi-year highs, with the help of more M&A reports (Pfizer and Astra Zeneca) and ahead of Q1 GDP data tomorrow that is expected to show a modest acceleration in the economy over Q4 13.

The euro shot up in European activity, seemingly led by sterling's advance, reaching $1.3880, an eleven day high. Fitch's upgrade of Spain before the weekend (BBB+ from BBB) and the firm EONIA may be encouraging some buying of the euro. We note EONIA was fixed above the repo rate last Thursday and Friday. Barring month end squeezes, last Friday's fix of 33 bp was the highest since a few months. Spanish 10-year bonds are bucking the heavier tone in the European bond market today. Robust gains in European equities may be sapping some strength from the bond market. German and Italian shares are leading the way higher, and the Dow Jones Stoxx 600 is up 0.6%, led by health care and financials.

The Swedish krona, though is the strongest of the major currencies today. The surge in March retail sales (1.1% vs. Bloomberg consensus of 0.2%) has given participants second thoughts about the prospects for a rate cut, which had been spurred by deflation (March CPI -0.6% year-over-year). Owing to a decision to reduce the number of meetings years, the Riksbank will not meet again until July.

The pendulum of sentiment will likely swing back and forth, but we suspect the key variable that the central bank's decision turns on is likely inflation/deflation, not the real sector. The next CPI report is due out May 13. Nearby support for the euro against the krona comes in near SEK9.0440, last week's low and break could spur a quick move toward SEK9.0.

The dollar briefly dipped below JPY102 before the weekend. It has traded in a narrow trading range in the third of a yen range above JPY102. We suspect that offers will be found in the JPY102.50-60 area today that may prove sufficient to cap the greenback. The somewhat stronger than expected March retail sales report (11.0% rise vs. consensus 10.8% and 3.6% in February) failed impress the foreign exchange market. The retail sales tax increases changes everything.

The economic performance after the tax, and specifically, after the initial hit, is the key. The BOJ meets tomorrow, but this is a non-event. The labor cash earnings report tomorrow may be more significant. Cash earnings contracted on a year-over-year basis in seven months last year and have begun off this year by contracting in both January and February.

Lastly, we note the Shanghai Composite fell for the fourth session today and by the most in seven weeks., with a 1.6% drop. Reports suggesting that the China Securities Regulatory Commission will approve at least four new IPOS at midweek may have weighed on sentiment. In addition, the country's largest life insurers reported a drop in profits.

There are also reports that regulators are clamping down on lending to the steel industry, a sector that has been identified by officials as suffering from excess capacity. This seemed to have been behind the 5% slide Chinese iron ore futures prices today. Meanwhile, the PBOC lifted the yuan's reference rate by 0.02% today to CNY6.1565, the highest since April 14.